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Bargain shares: Targeting multiple undervalued micro-cap value plays

A fund manager that holds a concentrated portfolio of 13 small and micro-cap value investee companies is delivering eye-catching returns this year and looks well set to continue doing so.
Bargain shares: Targeting multiple undervalued micro-cap value plays
  • Net asset value soars 20 per cent to 96.7p since early February.
  • Partial redemption of Real Good Food loan notes releases cash for new investments.
  • Company books hefty gain on Tactus investment in only four months.

Downing Strategic Micro-Cap Investment Trust (DSM:79.5p) is delivering the investment performance I hoped for when I recommended buying the shares, at 65p, in my 2021 Bargain Shares Portfolio. Net asset value (NAV) per share has increased by 9 per cent to 96.7p since the end of July, and is now 20 per cent higher than when I launched my portfolio in early February. At the time, I noted that Downing’s £50m investment includes several value small-caps on my active watchlist. They have been performing well.

For instance, around 7 per cent of the portfolio is held in Hargreaves Services (HSP:557p), a diversified industrial services group and brownfield land developer that is reaping the upside from a strategic transformation over the past four years. I initiated coverage on Hargreaves in a lengthy Alpha Report, at 206p (‘A high yielder offering significant hidden value’, 19 March 2020). The company’s share price was trading at 270p in February 2021 and has since doubled, and should rise materially above 600p in the event of a disposal of HRMS, the group’s German metals trading subsidiary.

Talks with suitors are ongoing and I expect Hargreaves to achieve a significant premium to HRMS net asset value of €40m (£34m) (‘Alpha alert for material gains’, 28 July 2021). Downing’s investment manager Judith MacKenzie shares this positive view. In an update to shareholders, she outlined a sum-of-the-parts valuation of HRMS which is around double book value, adding that “Hargreaves’ intrinsic value sits comfortably above the current share price and there is considerable scope to generate shareholder value here through numerous catalysts.”

Another 16 per cent of Downing’s portfolio is held in three portfolio companies: diversified financial services group Ramsdens (RFX), royalty company Duke Royalty (DUKE), and Aim-traded Venture Life (VLG:65p), a developer, manufacturer and distributor of products for the self-care markets. Duke is one of the top performers in my 2021 Bargain Shares Portfolio and I have high hopes for next week’s results (‘Bargain shares: Exploiting information voids’, 5 July 2021), while I continue to maintain stance on Venture Life (Venture Life: Investors overlook massive earnings upgrades’, 16 August 2021).

Middlesbrough-based Ramsdens (RFX: 165p) offers scope for decent investment side, too, as the business is set for a strong profit recovery as Covid-19 restrictions and international travel bans are eased (‘Upgrading target prices’, 22 June 2021). The group’s main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and precious metals buying and selling service. House broker Liberum Capital expects pre-tax profit to surge from £1m to £6.5m on 30 per cent higher revenue of £57.4m in the 2021/22 financial year, a realistic assumption given that a high proportion of incremental gross margin earned falls through to operating profit. On this basis, expect EPS of 16.1p, in line with Ramsdens’ earnings in both the 2018 and 2019 financial years.

Furthermore, with net cash of £15m (48p a share) on the balance sheet, Ramsdens’ directors have ample firepower to make opportunistic earnings enhancing acquisitions. MacKenzie shares my optimism, noting that “Ramsdens’ management team remain confident and are positioning the business for future growth. It has reported a pipeline of six new stores, investing to further grow its online presence, and is well positioned to outperform weaker competitors as we return to more normalised trading conditions.”

Simon Thompson's 2021 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 05.02.21Bid price 08.09.21 DividendsPercentage change (%)
Duke RoyaltyDUKE29p44p1.1p55.5%
San Leon EnergySLE27.5p40.75p0.0p48.2%
Vietnam Holding (see note one)VNH201.4p278p0.0p45.2%
Wynnstay GroupWYN424p500p10.0p20.3%
Downing Strategic Micro-Cap Investment TrustDSM69p78.5p0.8p14.9%
Ramsdens HoldingsRFX142.8p162p0.0p13.4%
Canadian General InvestmentsCGI3,611c4,050c44c13.4%
Springfield PropertiesSPR135.6p150p1.3p11.6%
Arix BioscienceARIX177p165p0.0p-6.8%
Average     21.9%
FTSE All-Share Total Return index7,1358,099 13.5%
FTSE AIM All-Share Total Return index1,3841,505 8.7%

Source: London Stock Exchange.

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering for the 3.9 per cent excess application ('Exploiting a tender offer', 4 August 2021). Total return reflects this cash distribution which will be made the week of 13 September 2021.

Shares in Downing’s largest holding, a 14 per cent weighting in electronics equipment group Volex (VLX), have rocketed from 75p to 486p since the manager first invested driven by profit upgrades. The board are currently guiding shareholders to expect 21 per cent growth in underlying operating profit to $52m in the 2021/22 financial year, but the risk is skewed to the upside for several reasons.

For instance, MacKenzie notes that revenue estimates for Volex’s electric vehicle segment look conservative. Consensus suggests only 30 per cent growth to $70m this year, but “if we consider ramping through the second half from a first half $5m monthly exit rate, it seems likely that the second half exit run rate revenue could be nearer to $8m, annualising to over $95m of revenue. Assuming electric vehicle operating margins of 10 per cent, then there is potentially a further $2.5m of upside assuming these run‐rates continue. This is just one catalyst for outperformance, and MacKenzie sees a credible pathway to Volex achieving its targeted $65m operating profit target on a pro‐forma basis over the short term.

Importantly, Downing has the firepower to make new investments, holding 13 per cent of the fund in cash, having received a £5.3m loan note repayment from food manufacturer and distributor Real Food Group (RGD:3p). This reduced exposure to the turnaround company to 9 per cent of Downing’s portfolio. MacKenzie makes the case that Real Food Group could report cash profit of £2m after central costs of £1.5m this year, and between £3m to £3.5m in 2023 as sales and cost initiatives kick in. Strip out central costs and a trade buyer could pay £28m for the business, and that excludes £7.5m of vacant property assets currently held for sale. To put these numbers into perspective, Real Good Food only has an enterprise valuation of £24m including debt of £21m, suggesting potential for a significant re-rating of the £3m market capitalisation company in which Downing holds a 7.52 per cent equity stake.

Downing’s investment team have been using the fund’s cash to make some shrewd new investments. Having only invested in capital light IT hardware vendor and designer Tactus in May (£759,000 loan notes and £1m equity), the unquoted company completed a £40m funding round in August backed by FTSE 250 listed technology investor Chrysalis Investments (CHRY). This enabled Downing to redeem its loan notes in full, sell down some of its equity stake at a decent profit, and retain a 2.54 per cent stake worth £1.6m that only cost £1m in May.

However, even though MacKenzie believes that prospects for the portfolio are brighter than at any time since Downing’s IPO in 2017, the share price still trades on an unwarranted 18 per cent discount to NAV. It’s worth following her lead. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on